Regulate Operating Systems as a Natural Monopoly

In MCI Communications Corp. v. American Telephone and Telegraph, the federal courts ruled that local telephone networks constituted an "essential facility" to which competitors must be allowed access even if no anti-competitive practices were involved in acquiring the facility. In the AT&T case, the government recognized that telecommunications networks constituted a natural monopoly and decided to grant an official monoply on the operation of such networks, introducing extensive regulation on the business practices allowed to telecommunications companies operating as common carriers.

The government could take similar action in the Microsoft case, identifying personal-computer operating systems as an essential facility for developing application software and regulating access to that facility (e.g. access to the code base, knowledge of upcoming OS enhancements). The fact that operating systems, like telecommunications networks, can be considered a natural monopoly is an argument in favor of government regulation of the OS market. Regulation is a frequently adopted policy in the case of natural monopolies. Public utilities such as electric power are one example of this.

This option would have the advantage of severely reducing the ability of Microsoft to gain an unfair advantage in software application markets simply because of its control of the operating system market. As the AT&T case proves, breaking up a large, successful company and regulating one part of its operations as a natural monopoly does not necessarily operate as a grave impediment to continued innovation in that field.

This option is not without its disadvantages, however. For one thing, valuable synergies between the operating system and applications that are possible because of Microsoft's vertical integration would be eliminated. Furthermore, the rapidly changing nature of the personal computer market means that the division between operating systems and applications, which, as the Microsoft case illustrates, is already blurred, is likely to become even more unclear in the future. Effective regulation of such a complicated and evolving industry by a technologically incompetent government is unlikely to produce results which are beneficial to consumers in the long run.